Monthly Archives: December 2017
Gold is down slightly in early U.S. trading. The yellow metal is mostly maintaining yesterday’s post-FOMC gains, but the corresponding retreat in the dollar seems to have stalled following this morning’s round of generally favorable economic data.
Initial jobless claims for last week were lower than expected. November retail sales were in line, but ex-auto beat expectations. Import and export prices were hotter than anticipated as well.
While the data seem to support Fed guidance for another 3 or 4 rate hikes in 2018, periods of data inspired optimism have tended to be fleeting. As noted yesterday, there is still cause for concern on the wage and inflation fronts.
Both the BoE and ECB held steady on policy today, and this divergence with the Fed is likely to provide some underpinning for the dollar. That in turn presents a bit of a headwind for gold.
However, seasonal pressures that have been evident in recent years, provide a potentially countervailing tailwind. If the pattern repeats of course.
Silver was able to regain $16 after the Fed announcement yesterday, but those gains have proven unsustainable thus far. Silver is back below $16 and most of the pullback in the gold/silver ratio from yesterday has already been retraced. Silver remains very undervalued, presenting an intriguing value proposition.
The eurozone’s central bankers have left interest rates unchanged at their lowest levels on record and kept their commitment to do more should growth disappoint, in a decision that marks the end of a strong year for the economy of the single currency area.
…The central bank reiterated that it “stands ready” to increase the size of its bond-buying programme — dubbed quantitative easing — in what now seems the unlikely event that the recovery will veer off track. Interest rates would remain on hold until “well past” the end of QE.
The Bank of England has held the benchmark interest rate at 0.5 per cent in a unanimous 9-0 vote.
The central bank confirmed it thinks “further modest increases” in interest rates are likely to be needed to help bring inflation down to its target of 2 per cent over the next few years.
U.S. import prices +0.7% in Nov, in line with expectations, vs +0.1% in Oct. Export prices +0.5% on expectations of +0.3%.
U.S retail sales +0.8% in Nov, above expectations of +0.3%, vs +0.2% in Oct. Ex-auto +1.0% on expectations of +0.6%.
Gold higher at 1257.51 (+3.21) Silver 16.04 (+0.02). Dollar lower. Euro steady. Stocks called higher. U.S. 10-year 2.36% (+2 bps).
Gold took the occasion of the Fed winding up its meeting to bounce off December’s lows and begin moving higher. Gold finished up $11 today at $1255, but up $20 from its $1235 low water mark earlier in the day. Silver finished up 33¢ at $16.03 and 42¢ from its low on the day. Both are up marginally in Asian markets.
Quote of the Day
“While the lack of liquidity and increased volatility may keep bitcoin interesting, it’s unlikely to convince investors looking for the kind of diversification and hedging benefits which gold has proven to possess over its long history.” – Jeffrey Currie and Michael Hinds, Goldman Sachs
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Gold jumped more than 1% on Wednseday, after the Fed did exactly what everyone was expecting. Silver surged more than 2%, reclaiming the $16 level for the first time this week.
The Fed raised interest rates by 25 bps and guidance for next year suggests they remain on track for at least three more hikes. However, both Chicago Fed President Charles Evans and Minneapolis Fed President Neel Kashkari dissented.
That dovish dissent may serve to temper market expectations for further tightening of policy in 2018. While Fed claims to be optimistic on growth and employment, expectations for subdued inflation, wage growth and productivity persist: Even with fiscal stimulus from tax cuts being taken into consideration.
While the GDP projections for the coming years were edged up, growth over the next two-years of 2.5% seems to mark the high point of expectations. The outlook drops to 2.0% by 2020 and the long-range forecast remains at 1.8%. Huh, is that really “optimistic”?
At any rate, the dollar retreated after the policy release, providing some buoyancy to precious metals. We’ll see if there’s some upside follow-through into the new year, as has been the pattern in recent years.
Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Averaging through hurricane-related fluctuations, job gains have been solid, and the unemployment rate declined further. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. On a 12-month basis, both overall inflation and inflation for items other than food and energy have declined this year and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Hurricane-related disruptions and rebuilding have affected economic activity, employment, and inflation in recent months but have not materially altered the outlook for the national economy. Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong. Inflation on a 12‑month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/4 to 1‑1/2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
Voting for the FOMC monetary policy action were Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Patrick Harker; Robert S. Kaplan; Jerome H. Powell; and Randal K. Quarles. Voting against the action were Charles L. Evans and Neel Kashkari, who preferred at this meeting to maintain the existing target range for the federal funds rate.
A December rise in the federal funds rate to a range of 1.25% to 1.50% has long been baked into Wall Street estimates. Economists will therefore be paying closer attention to the Federal Open Market Committee’s (FOMC) policy statement, its latest economic forecasts and Janet Yellen’s last press conference as the central bank chair.
…In their September estimates, Fed policymakers foresaw as many as three rate hikes in 2018 and a couple more in 2019. Lagging inflation has created some uncertainty around that path, and Fed Chair Janet Yellen herself recently acknowledged the worry that the low readings might not be “transitory,” as many officials had expected.
Gold steadied near its weakest level in almost five months on Wednesday amid expectations the Federal Reserve would raise interest rates again at the conclusion of its last policy meeting this year.
The Fed has increased rates twice in 2017 and is still expected to push through three more hikes next year.
…”It’s just consolidating here at the moment until the Federal Open Market Committee statement is out. We’re expecting a rate hike,” the trader said, on gold’s behavior in Asian trading.
Gold is up slightly as the market eagerly awaits the Fed policy decision later today. The yellow metal remains generally on defense, having set a 5-month low yesterday at 1235.90. We’ll see if the December FOMC meeting closely corresponds with a market low for a third consecutive year.
The Fed is widely expected to announce a 25 bps rate hike at 2:00ET today. Focus will be on the forward guidance within the statement and dot-plots, as well as what is likely to be Janet Yellen’s final presser as chair.
Headline CPI met expectations at +0.4% in November, pushing the annualized pace of consumer inflation up to 2.2%. However, core inflation rose just 0.1% m/m and the annualized pace slowed to 1.7%.
There doesn’t seem to be cause for much optimism on the wage or inflation front. I mean, you can only cry “transitory” for so long before you need to acknowledge something structural might be occurring. One really only need look at Japan’s experience over the last 30-years to perhaps get an inkling of what’s in store. Certainly tighter monetary policy is not going to help the cause.
U.S. CPI +0.4% in Nov, in line with expectations, vs +0.1% Oct; +2.2% y/y. Core +0.1%, below expectations of +0.2%, vs +0.2% in Oct; +1.7% y/y.
Gold better at 1245.42 (+1.71). Silver 15.76 (+0.02). Dollar steady. Euro higher. Stocks called higher. U.S. 10-year 2.38% (-2 bps).
U.S. Treasury budget deficit widened to -$139 bln in Nov, outside expectations of -$135.0 bln, vs -$63.2 bln in Oct and -$137 bln a year-ago.
Gold’s downtrend is entering its seventh day as prices have broken below another key support level, but analysts say that lower prices could provide a significant buying opportunity.
…Bill Baruch, president of Blue Line Futures, noted that gold seasonally bottomed in the second half of December only to finish higher by the end of January in nine out of the last 12 years.
“We believe the best place to buy would be in front of $1,225,” he said. “Ultimately, we are looking for a bottoming setup to buy gold and stay long into and through January.”
Gold’s annual slide ahead of the December FOMC decision continues, with a new 5-month low established at 1235.90. The dollar index has edged to a new 4-week high in anticipation of a rate hike tomorrow and perhaps more hawkish guidance for 2018.
However, there is another camp that believes weak wage growth and inflation continue to warrant a note of caution on the part of the Fed. These were the precise reasons the central bank opted to pause the tightening cycle back in September, and neither condition has materially improved in the intervening months.
Before the policy statement is released, the market will get a look at November CPI. While an uptick in the annualized pace of headline consumer inflation is anticipated, core inflation is expected to remain stagnant.
Congressional Republicans are reportedly closing in on a reconciled tax bill. There’s very little margin for error here, as the Republicans can’t really afford to lose more than one vote in the Senate.
One thing seems certain, the legislation will add $1.5 trillion to the debt over the next decade, the maximum allowed. It will likely be quite a bit more, especially if the long-overdue recession strikes at some point during the next 10-years.
Then Congress only has until December 22 to pass a budget and raise or suspend the debt ceiling. Or of course, they could always kick the can again.
Which brings us full-circle back to the Fed. Rising debt and tighter policy — via higher rates and so-called “normilization” of the Fed’s balance sheet — creates a significant headwind for growth. The Fed could end up triggering that overdue recession.
After another disappointing trading session, one bank sees gold ending the week on a positive note, with prices possibly moving up to $1,300 an ounce if the Federal Reserve hints at weak inflation on Wednesday.
“Should inflation disappoint or the Fed communicate some caution with regards to the persistence in weak inflation, the yield curve’s flattening could play a big role in sending gold prices back to the $1,260-$1,300/oz range,” said head of commodity strategy at TD Securities Bart Melek in a report published on Monday.
Gold is down slightly in early U.S. trading, having eked out a new 5-month low at 1238.90. Gold continues to be pressured by a stronger dollar as the Fed begins their 2-day FOMC meeting.
A 25 bps rate hike is fully expected when the Fed announces policy tomorrow. Dollar and yield strength seems to reflect growing expectations of more hawkish guidance for 2018.
Headline PPI rose 0.4% in November, pushing the annualized rate to producer inflation to a 6-year high of 3.1%. However, core PPI remained steady at +2.4% y/y, despite a higher than expected m/m rise of +0.3%.
November CPI comes out tomorrow in advance of the Fed’s announcement. Headline CPI is expected to rise to a 2.2% annualized pace, while core CPI is anticipated to hold steady at +1.8%.
Along with the Fed decision tomorrow, we’ll get the central bank’s economic forecasts and Chair Yellen will hold a press conference. We’ll see how optimistic the Fed is about wage and price growth in the year ahead.
Silver remains under pressure as well, also edging to new 5-month lows with the breach of last week’s low at 15.62. Silver is pretty oversold at this point, but $16 must be regained to ease pressure on the downside.
The surging price of bitcoin has not put investors off buying gold, with “no evidence of a mass exodus” from the safe haven metal despite a drop in prices recently, according to research released by Goldman Sachs this week.
Jeffrey Currie, Goldman’s global head of commodities research, said that the groups of investors looking to invest in the two assets are vastly different, therefore protecting gold demand, he wrote in a note to clients reported by the Financial Times.
…”We believe the composition of demand between bitcoin and gold is the key difference in the recent price action. In our view bitcoin is attracting more speculative inflows relative to gold.”
U.S. PPI +0.4% in Nov, in line with expectations, vs +0.4% in Oct; +3.1% y/y. Core +0.3%, above expectations of +0.2%, vs +0.4% in Oct; +2.4% y/y.
Gold steady at 1242.72 (-0.28). Silver 15.75 (unch). Dollar and euro steady. Stocks called mixed. U.S. 10-year 2.40% (+1 bp).
Gold was down $6.40 today at $1291 and silver was down 14¢ at $15.69. Thus far in December gold is down $38 and silver is down 72¢.
Speculators the long side of the futures market are well aware of the “December effect”, i.e, the fact that Decembers do not treat the precious metals kindly. Judiciously, they have elected to keep their powder dry for the time being. That collective recalcitrance, particularly with another Fed meeting on the immediate horizon, has left the short side to temporarily have its way. Come Christmas-time, if past history holds true, we might be writing a different story in these evening reports.
Quote of the Day
“So what happens when bitcoin blows up? If history is any guide then in periods prone to investment bubbles, like ours with its low cost of capital and highly inflated asset prices, then speculation will move on to something else. Why should it be gold and its even shinier sister silver? Well, historically, the people who always do best out of any investment bubble are usually those that cash out and buy precious metals.” – Peter Cooper, The National
The December issue of News & Views, is now available. We invite your interest.
After bitcoin’s spectacular price spike this year, could gold be about to stage a similar grand finale to its bull market that began back in 2000?
Bitcoin also took many years before its final speculative reach-for-the-sky. Indeed, the scramble to buy at the last minute has been reminiscent of gold’s previous price spike back in 1980 after a long run up in prices during the economically unstable 1970s.
There are certainly goldbugs who argue for $10,000 an ounce convincingly. Ex-CIA macroeconomic adviser Jim Rickards’ latest tome, The New Case for Gold explains how gold will again be needed as a linchpin of the global economy.
PG View: That price target seems pretty optimistic, but given the rise in BitCoin this year, why couldn’t a real tangible asset make a similar jump?
Gold is down, pressuring the 4+ month low established last week, as focus shifts to this week’s FOMC meeting. The Fed will announce policy on Wednesday and it is widely expected that they will raise rates by 25 bps, despite still moribund wages and inflation.
However, the last two December rate hikes (2015 and 2016) closely corresponded with significant lows in the price of gold. The market could be setting up for a similar event this time around, but in 2017 gold has been comparatively buoyant ahead of year end.
David Fickling, writing for Bloomberg, notes the distinct seasonal trend that has emerged over the past decade. “Whatever the reason, it’s enough of a consistent pattern these days that it’s starting to become a self-fulfilling prophecy,” says Fickling.
In 2016 and 2015, the lows actually occurred in December. “If history is still reliable, January will be a great month to own precious metals,”said John Rubino in a separate note for Sprott Money.
With BitCoin futures now trading on the CBOE, many are arguing that the meteoric rise of the cryptocurrency is stealing gold’s thunder. This is happening at the same time that many are warning BitCoin has become the biggest bubble since the Tulip-Mania of 1636-1637.
Certainly BitCoin has been stealing headlines this year, but how long can this last. Clearly longer than many first thought, but with each push to new highs, it arguably becomes increasingly unstable.
Bitcoin really hasn't turned out even remotely as it was intended to.
– Rather than a currency, it's become a speculative asset.
– Rather than efficient, the energy and CPU costs are extravagant
– Rather than decentralised, ownership and mining power are hugely concentrated
— Carl Miller (@carljackmiller) December 10, 2017
That tweet outlines some very serious concerns. One that is not mentioned, is that to this day, nobody even knows who the creator of BitCoin is in reality. Investing — or perhaps more appropriately speculating — in an asset where that critical piece of knowledge is missing seems crazy to many.
Nonetheless, it’s just one of many oddities that have emerged since the financial crisis that seem to have little grounding in economic reality. That of course doesn’t preclude further gains, but like the price, the risks seem astronomic as well.